An expansion of Kentucky’s 6% sales tax to a new list of services was conspicuously left out of a state revenue bill passed by Kentucky lawmakers last spring, and the Northern Kentucky Chamber of Commerce is pretty happy about it.
Tami Wilson, Vice President of Public Affairs for the Northern Kentucky Chamber of Commerce, championed the development at Thursday’s meeting of the Florence Business Council at Turfway Park Racing and Gaming. She called the absence of a new round of sales tax on business-to-business services “the best part” of 2024 House Bill 8, the revenue bill tied to Kentucky’s two-year $128.4 billion spending plan for the fiscal year beginning July 1.
“That’s a biggie because back in 2022 if you recall, there was a whole laundry list of different taxes they added in order to try to make revenues in order to hit certain personal income tax triggers,” said Wilson. Avoiding additional business-to-business sales taxes is critical, she said, telling attendees at Turfway that the NKY Chamber was “willing to go to war, if you will, over what is taxed” to limit the tax burden.
“We didn’t have to, which is great news, especially in a long budget session,” Wilson said.
Business organizations like the NKY Chamber lobbied against expanding the sales and use tax specifically as it relates to business-to-business sales—or intermediate transactions (also called “business inputs”) before the final sale to the consumer—during the 2024 legislative session, which ended in April.
A concerted push against a new sales tax round came after the 2022 and 2023 Kentucky General Assembly added more than 30 types of services to the sales tax rolls. That expansion followed a 2018 revenue measure that added sales tax to over a dozen services, including janitorial services used by businesses.
The sales tax was most recently expanded to business services, including lobbying and employer recruitment services. A sales and use tax on marketing services in Kentucky was repealed in 2023.
NKY Sen. Chris McDaniel (R-Ryland Heights), chair of the Senate Appropriation and Revenue Committee, is a key player in state revenue bill negotiations. He told LINK nky in a statement Thursday that the Senate Republican majority is committed to keeping the state’s tax burden low.
“We’re proud that over the last six years, we’ve lowered the personal income tax by 33% and have made Kentucky a better place to live,” said McDaniel. “Individual taxes are always taken in the context of the entire code, and we remain committed to minimizing the tax burden on Kentuckians. Ultimately, every public dollar at our disposal is the product of a Kentucky taxpayer’s investment of time and energy.”
Now at 4%, the state’s individual income tax rate has been on a downward slide for the past two years under two parameters (often called triggers) set by the state’s 2022 revenue bill, also called House Bill 8. Those triggers only allow a half-percent reduction in the individual income tax rate per fiscal year if: 1) the state’s budget reserves are 10% or more of state general fund revenues from the prior fiscal year and 2) state tax revenue from the prior fiscal year exceeded spending as prescribed by law. Both triggers must be met before lawmakers can vote to reduce the rate another half percent.
The individual income tax rate fell under 2022 HB 8 from 5% to 4.5% in 2023, then fell another half percent to the current 4% in January. Because only one of the two triggers were met for 2025, however, the rate will stay at 4% for 2025.
In Florence on Thursday, LINK nky asked Wilson if she thought the legislature would hold off on any further expansion of the sales tax on services in the future. Given the individual income tax elimination goal, she said she isn’t sure.
“The goal is to get to zero. Some say if we get to 3%, that’s a very competitive position to be in without having to look at greater taxation, so I think it’s going to depend on the appetite of the legislature as to how hard they want to work to get that zero,” she said. “I think it will be a battle. I don’t think they’ll ever tax groceries, pharmaceuticals, any of those sorts of things. However we could see more of the luxury type taxation on sales. If they bring that up, it will be once we get to that 3% (individual income tax rate) or less.”
“I think it will be much more ferocious of a discussion at that point. So I think that’s an ongoing discussion for sure,” said Wilson.
Expansion of the sales and use tax to new services was cited in a 2024 report by the nonpartisan research Tax Foundation as a way for lawmakers to offset reduction in the income tax. Supported with grant funding by the Kentucky Chamber of Commerce, NKY Chamber, Commerce Lexington and Greater Louisville Inc., the report credited expansion of the sales tax in 2018 and 2022 with helping offset the income tax cut.
It also cautioned against broadening the state sales tax base using “business inputs” to achieve the income tax reduction goal going forward.
“As lawmakers have contemplated ways to accelerate planned income tax rate reductions, another round of sales tax base broadening could emerge as an attractive possibility,” said the report. “Unfortunately, the ‘easiest’ way to dramatically broaden the base is often to ignore untaxed final consumption and instead look to intermediate transactions—business inputs—as sources of additional revenue. The potential revenue gains are large, and estimates either already exist or are relatively easy to come by. Enticing as this approach may be, however, it is the wrong approach for Kentucky and would reverse the competitive gains the Commonwealth is making in its campaign to lower income tax rates.”
The report added “paying down income tax rates specifically by expanding the sales tax to more business inputs would make the Commonwealth’s tax code worse, not better.”
Over 1,200 bills were filed during the 2024 General Assembly, with the state budget and revenue bills listed as top legislative priorities. NKY received over $193 in one-time budget surplus funds last session, in addition to hundreds of millions in regular budget appropriations (including $164 million plus for NKU, $55 million plus for early childcare programs and $3.12 million for renovations at Big Bone Lick State Historic Site).
More than $1 billion was budgeted by lawmakers last session for transportation needs throughout Boone, Kenton and Campbell counties.